How SteadyOptions Calculates Performance

Our readers know that our returns have been tracked by Pro-Trading-Profits, an independent third party website that tracks performance of hundreds investment newsletters. They provided an excellent explanation how to analyze and compare performance of different trading systems.

AGGREGATE vs. ROI

When you start looking at the different ways in which trading results are analysed, you’ll notice that they fall into two broad categories, Aggregate Analysis and Return on Investment analysis. Most investment services use versions of Aggregate Analysis which is a slippery slope into results that are at best misleading, at worst, deceptive.

Let’s say, for example, that a service did one trade in the month. They make 10% on that trade. According to Aggregate Analysis, they would then claim that they had made 10% for the month. But did they?

In another instance a service does 4 trades for the month, averaging 10%. They claim, according to Aggregate Analysis, that they made 10% for the month. Really?

And probably the most common example is when they’re calculating yearly returns. Say they did 20 trades for the year and the sum of all those trades (that is, the return for each trade added together) was 100%. Their claim, according to Aggregate Analysis, was that they made 100% return for the year.

How most services report returns

So all Aggregate Analysis does (and this is where its name comes from) is add the results of the individual trades together. And you can understand why a service would do that – it’s not only simple but, most importantly, it shows off their performance in the best possible light. Hey, if you could do one trade and make 10% a month, why wouldn't you subscribe?

Because you haven’t actually made 10%, that’s why. Not in the way that most people would think about trading or investment returns. 10% return assumes that you allocated your whole account to that single trade - which of course is insane.

Let’s assume you have a bank of $10,000 and you’re risking 5% per trade because you’re trading options and options are risky. So that’s $500 maximum per trade. The trade makes 10% which is $50, so you’re out for $550.

What return did you make for the month?

$50 / $10,000 = 0.5%

No, you did not make $1,000, as the 10% return suggested you would. You only made 0.5% because, normally, returns are calculated based on the total investment. And your total investment wasn't just the $500 you put at stake for that particular trade, it was the entire $10,000 you have in your trading account, because while it’s sitting there in your trading account it isn't doing anything else. You can’t have it invested elsewhere earning money for you – it has to be in your trading account so you can practice proper money management and risk allocation.

How SteadyOptions reports returns?

We will always report our returns based on the whole account. The performance of the model portfolio reflects the growth of the entire account including the cash balance. Some services consider a $500 gain on a $1,000 investment to be a 50% return when the whole account is worth $10,000. We consider this to be a 5% return — and that is the honest way of doing the calculations.

We also always report performance based on the same allocation. Imagine a service making 3 trades per month and making 10% per trade. They would report 10% return. That means allocating 33% per trade. But wait - what if you need to adjust the trade? You absolutely need to keep at least 20% in cash for adjustments, so your real return is 8.0%. To add insult to injury, if they make only 2 trades in a certain month, they would still report 10% return. That means allocating 50% per trade. But how could you do that if you usually make 3 trades?

Our Model portfolio is based on starting value of $10,000, compounded monthly and reset every year.

We start with $10,000 each year and compound as the year progresses. Initial full position is $1,000 (10% of the portfolio) and half position is $500 (5% of the portfolio). The allocation for each individual trade is based on 10% of the current value of the performance tracking portfolio (5% for half allocation trades). This means that a 10% allocation when the portfolio is at 10K is smaller than a 10% allocation as the portfolio value increases. For example, a trade closed at the end of 2018 when the portfolio was around 20K had a 10% allocation of around $2000. This is simply following the standard for the performance reporting.

Therefore, the dollar gain/loss for each trade in the performance tracking will likely be different from the dollar gain/loss of the official trade. This is because of both the 10% allocation size for the performance tracking changing as the portfolio value increases and also because option trades cannot be allocated at an exact dollar amount.

For example: FB trade on 12/28/17 (last trade of 2017) produced 40% gain. If we make 40% on $500 it is $200. But we base the positions on the new portfolio value at the end of each month (23,551 at the end of November 2017) so full position is $2,355 and half position is $1,177. 40% of $1,177=$471, so the portfolio increased from 26,014 to 26,485. This is what compounding means.

There might be a slight difference in reported performance and actual performance for the 10k portfolio due to the fact that we cannot buy partial contracts.

There are a lot of other dirty tricks that some services use to push up their numbers. It might include reporting based on "maximum profit potential", calculating gains based on cash and not on margin etc. You can read my article Performance Reporting - The Myths And The Reality for full details.

Still skeptical? Why not to take the SteadyOptions free trial and see by yourself how we are different from other services. Please refer to Frequently Asked Questions for more details about us.

If you liked this article, visit our Options Trading Blog for more educational articles about options trading.

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We want to hear from you!

"Our Model portfolio is based on starting value of $10,000, compounded monthly and reset every year.
We start with $10,000 each year and compound as the year progresses. Initial full position is $1,000 (10% of the portfolio) and half position is $500 (5% of the portfolio)."

Compounded monthly means that you base the positions on the new portfolio value at the end of each month. All full positions in a month are 10% of the new portfolio value at the end of the preceding month?

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I had a questions about Monthly performance reporting. Is it based on the Trades opened date or Trades closed date?

I mean I am sure there would be several trades taken almost near end of month and they would usually be closed in the next month. These trades are reported when closed in the new month? I would assume so but wanted to confirm this.

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Guest Optionyes

Question 1: In #5 ''But we base the positions on the new portfolio value at the end of each month'', why is it based on the end of each month and not the end of each previous trade? For example, if we take the same FB trade of 2017, why is the half position based on the $23,551 of the end of November 2017 and not the $25,826 that is the amount right before the FB trade?

Question 2: You said you trade allocations (10%) or half-allocations (5%). If we have $10,000 in the account, that would be respectively $1,000 and $500. What if the trade costs $350? or $800?

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Our Model portfolio is based on starting value of $10,000, compounded monthly and reset every year.

We could compound after every trade (which would increase the returns), but technically it would assume that we have only 1 trade open at any given time, and open a new one only after the previous one is closed, which is not the case. Compounding monthly is much more conservative method of calculating returns.

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About Us: Our options advisory service offers high quality options education and actionable trade ideas. We implement mix of short and medium term options trading strategies based on Implied Volatility.

Disclaimer: We do not offer investment advice. We are not investment advisors. The information contained herein should not be construed as an investment advice and should not be considered as a solicitation to buy or sell securities